Free Trade: A Ticket to a Bigger Party

From the Winter 2015/16 Issue “Latin America On Life Support?

For the past nine years, Ángel Gurría has presided over the Organization for Economic Cooperation and Development (OECD) as its fifth secretary-general. But Gurría’s early career was remarkable in its own right—the man who served as the principal architect of Mexican economic stabilization, cutting the nation’s bloated government spending six times when he served as Minister of Finance and Public Credit under the administration of President Ernesto Zedillo. That followed a term as Minister of Foreign Affairs when he restructured his nation’s foreign debt and helped negotiate the North American Free Trade Agreement (NAFTA), still the prototype for such free trade pacts. Trained as an economist, comfortable in six languages, and specializing in economic development, Gurría has been a vocal advocate, during his two terms at the helm of the OECD, for sustainable growth and employment and rising living standards. From his perch at OECD headquarters in Paris, he presides over an organization dedicated to transparency and fighting corruption—critical elements that Gurría and the OECD believe will help improve governance and growth, in the developing as well as the developed world, but especially in Latin America where Gurría retains close ties. He spoke with World Policy Journal Editor David A. Andelman and Managing Editor Yaffa Fredrick from Guadalajara, Mexico, where he was attending the Fifth OECD Global Forum on Well-Being, one of his primary global initiatives.

WORLD POLICY JOURNAL: Let’s start with the International Monetary Fund and several other financial institutions. They have issued reports, indicating their disappointment in the pace of development and growth in several emerging and developing economies in Latin America, and Mexico specifically. Do you share their concern? 

ÁNGEL GURRÍA: One qualification I would make is that Mexico is one of the better performing countries this year, probably growing between 2 and 2.5 percent, next year maybe between 3 and 3.5 percent. But the problem with the region at large is that it was benefiting from this bonanza of raw materials—oil, copper, iron, even food products. Of course, while you are going through this prosperity, you feel good. You feel nothing has to change. You feel you don’t have to make any reforms, and then when the proverbial wave hits, the tide leaves the beach, and you are left without your swimming trunks. The question is, of course, about reform again. Who did their homework? And I go back to Mexico. I happen to be Mexican—that’s a happy coincidence. But, again, Mexico undertook about 14 or 16 major reforms. By major, I mean they have been waiting in the wings for maybe 30 or 40 years without being touched. Suddenly, what you have is that the massive car industry and aerospace companies are using the advantages of the reforms, which were created so many years ago, more than 20 years before NAFTA. I would say that differentiates the case of Mexico.

But this is the second year Latin America as a region will grow less than the average of the OECD. Just to give you an idea of how serious this lump is, but also how grave in terms of the consequences. If you have low growth in the Netherlands, or in Switzerland, or in Germany, or in France, where we are based, the accumulated well being, the accumulated standard of satisfaction of your basic needs, the quality of the food, the quality of the health care, the quality of education, the quality of infrastructure, the quality of water is such that one or two years of slow growth, even of recession, will make little dent in the armor. In the case of Latin America, we are talking about millions of young men and women who are going to be left without jobs, but also without safety and benefits. Their lives are a lot tougher because they don’t have umbrellas. The state does not protect them in the same way. So this is why growth in Latin America is so critical. Growth in Latin America is the big element of social protection.

WPJ: Do you blame this on the collapse in demand for commodities, especially exports to China? We know that Brazil, Ecuador, Chile, and Peru are relying heavily on exporting commodities, particularly to China, and these prices have imploded lately. 

GURRÍA: Yes, but note—it’s the policies. It’s always the policies. These countries were watching prices of the same commodities grow from much lower to much, much higher. The problem is when they are much higher, you have this abundance of resources, so isn’t that the time to load up for the time they will be lower? There are known cycles for commodities prices. We are now at the end of a supercycle of commodities. And the question is how much homework was done? First of all, to diversify, to focus on structural change, on education, on innovation, on the regulations to focus on the question of flexibility in the labor markets, flexibility in the product markets, how much money is dedicated to research and development, are the universities linked up with the research centers, linked up with the private sector, linked up with the market? The legacies of the crises are low growth, high unemployment, growing inequality, but also a massive collapse of trust.

WPJ: But also a lack of diversity in their economies?

GURRÍA: Well, diversification—this is the big issue. If you depend only on one commodity or two, and on one destination or two, you are bound to suffer because it’s not going to be triple A all the time. Right now you are suffering both. Demand in the particular countries that were the biggest consumers of these commodities dropped. China, in particular, has slowed down—from 11 percent to 6.7 percent, which is not bad, but still it’s significant. And second, you have the supply side. What these exporting countries have, what these economies have, are the same thing they had 10 years ago, 20 years ago, 30 years ago, so they have not diversified. They have not injected new knowledge or technology. They have not injected complexity, and they haven’t even tried to work with the commodities that they export. It’s a story of missed opportunities. Still, it’s never too late.

WPJ: It seems that basically there are two tiers developing within Latin America—those like Mexico that are doing pretty well through all of this, managing to find the way through, and others that are not. I’d like to turn for a moment to the Trans- Pacific Partnership (TPP) trade agreement because it seems to exclude a number of Latin American countries that could use some help. Indeed, only Chile, Mexico, and Peru are included. What might be the impact in those countries that are excluded from this pact? Are you concerned about that?

GURRÍA: It’s not a coincidence that the countries that are a part of the TPP are countries that started integrating through the Alliance of the Pacific. Basically what you have is countries willing to reform and that then put their money or their resources or their decisions where their mouth is and get together and find that there is a reinforcing element here. One plus one is five, and one plus one plus one is 25. Who formed the Pacific Alliance? Chile, Mexico, and Peru. Aren’t they the ones who are doing better throughout? But is it because they are in the Pacific Alliance? No. They were better off before; they were managing their economies. But now they realize that integration is the next big step, that they need to integrate their stock markets, have a free flow of goods and even people, and then, of course, no tariffs. Then they are making real progress with this kind of liberalization in Latin America.

Now even with all this Latin American integration, for 50 or 60 years they have been trying. Yet still, today, interregional trade is so small. So, it means that there is a lot of potential, but also again, is it a coincidence that these three are the ones to join TPP? Absolutely not, they are the ones who understand and believe that today, when it comes to trade, unilateral disarmament is the best thing you can do. Mexico, Chile, and Peru are not pushing all the other guys to say, ‘Oh, you reduce your tariffs on your own textiles, and I’ll reduce my tariffs on leather, and you reduce your tariffs on cars, and I’ll reduce my tariffs, and so on.’ Basically, Mexico went with unilateral tariff reductions completely, because the cheaper your imports, the easier it is to become a big exporter and be competitive, and also you maintain your labor competitiveness.

So what is happening? They are getting the flows of foreign investment. No surprise. Nothing happens accidentally, and the ones who did not do the reforms, the ones who are questioning whether free trade is a good idea, the ones who are not integrated although they have announced so many times they would integrate and actually have an integration process going on for all these years, well, they are now in a slump. With the world economy, with China not as dramatic an engine of growth as it was before, they are suffering the consequences. Still, it’s never too late to do the right thing.

WPJ: But there are some concerns raised by the opponents of TPP: that it still has a lot of failings, especially for the disadvantaged. It does little to protect workers and union rights, favoring big pharmaceuticals and other multinational companies instead. Are you concerned that this will widen the gulf between the haves and have-nots?

GURRÍA: This was not a free trade negotiation. It’s about regulatory issues. Tariffs are so low now, especially between these countries and the United States. There is little room to move lower. When you are talking about these three Latin American countries, they themselves dropped tariffs practically from day one, so it’s not about a classic free trade pact. But also, you cannot get an agreement to safeguard collective bargaining for unions in a country. That has nothing to do with a free trade agreement; it has to do with the laws in individual countries. Look at how it works in Spain. Free trade is going to create 1 million jobs this year. Last year it created half a million jobs and with the economy growing only at 1 percent. Before, Spain needed to grow at 3 percent to create the first new job. The flexibility that was built into the system is helping the workers and assisting in job creation.

The rigidity, which was supposedly a big protection for workers, was keeping young people out of the job market because the incumbents were inside the walls, fully protected. And all these young people were knocking on the door but not able to get in. Why? Entrepreneurs would not want to create a job because it was so expensive, so litigious, so uncertain when they wanted to fire someone or adjust their work base. It’s obvious who in Europe went first. Germany went first in the flexibility of the labor market, and they are still enjoying the benefits for more than 10 years. Spain went only three years ago, so it’s only starting to see the benefits. [Italian Prime Minister] Matteo Renzi did it last month when he finished putting together the last pieces of legislation for the jobs act, and they will see the benefits in one to three years. But you know what’s happening in Italy? Already, they are creating 125,000 jobs in the last few months. I remember when we signed NAFTA, there were all these concerns, and now trade has multiplied by six or seven times. The best paid jobs are the ones in companies that export mostly to the U.S. People no longer doubt the benefits. And the reason is simple: When you have small countries accessing the United States or China, you get a ticket to a bigger party. Your benefits can be enormous.

WPJ: You did a study on the relationship of inequality and economic growth, and argued that inequality is a hindrance to economic growth.

GURRÍA: Latin America is not the poorest region in the world, but it’s the most unequal. The reason is that the tax and social benefit structure of Latin America is just as unequal as the U.S. when it comes to basic income before taxes and before benefits. But then you apply the benefits and the taxes, and you come out with a much flatter curve, with a much fairer social structure in the United States. In Latin America, because so few people pay taxes and because the states are relatively weak fiscally, you have very little capacity. The services in terms of education, in terms of health, infrastructure, hot and cold running water, and housing are less generous, and certainly starting with unemployment benefits, which is a big issue. Informality, inequality, and productivity, those are the three big challenges. Those are the things you’ve got to fix.

WPJ: The OECD has developed in the last years the Better Life Index that doesn’t measure economic success based on GDP. What are the key findings in the Better Life Index in relation to Latin America? Specifically, what were the kinds of core values there that determined happiness?

GURRÍA: This is a fascinating question because every country has its own set of weights in terms of the Better Life Index, and we now have it in different languages. It’s going viral in so many places. We’ve had millions of responses, and not surprisingly, the better off a country is in general, the more the qualitative aspects of life matter. Whereas in Latin American countries, where 50 percent of the population is in poverty, maybe a quarter of the population is in extreme poverty, where 50 percent of the job market or more is informal, where productivity has been growing very gradually less and less, or even dropping, people are more interested in jobs, income, the quantities of life, rather than the qualities of life. That is intuitively to be expected. But there is one element that seems to be quite important that we have to capture and that is the appetite for better transparency, more integrity in government, and the other one is better rule of law and better justice systems.

WPJ: But that is the elephant in the room.  The countries that are in the TPP, for instance, and that you’ve named as the principal developing countries in Latin America, are the ones with the best rule of law, the least autocratic, and with the greatest freedoms. So are you able to have real economic development until you reach that point in the development of the political cycle, in the political life of the country?

GURRÍA: Well again, your question goes right to the heart of the problem because you are talking here about the quality of governance, the quality of government, which is more important or goes first in the pecking order than getting your wages right, getting the size of your deficit, or getting your debt down. Because if you do not have good governance, you are not going to be able even to get your legislation through. The problem in many cases is that you can have impeccable legislation—and we help our member countries write laws that use the best possible practices in the world—and then nothing happens. So you come back the next year, and the year after, and the situation continues, because there are vested interests, and because there is incompetence, or there is corruption, or all of the above. This is why we are also focusing also on the qualitative part and on the governance part. Certainly, you have legacies—low growth, high unemployment, the question of inequality—but then this disruption in trust has to do precisely with what you mentioned. This questions fundamentally the rule of law. People are very cynical, thick skinned. The man in the street is saying, “I’m unemployed, or a lot of people around me are unemployed. We are not having a good time.”

Rich people don’t pay taxes. The multinationals don’t pay taxes. The services are not good, so, basically, they become very hostile, and this happens in Latin America, but it also happens all over the world. The problem is that we are coming from behind in Latin America. We have to observe the Avis rule. Some years ago, when hiring a car at Avis, the employees would say, “We’re number two, therefore we try harder.” Today, it’s not just “We try harder,” it’s the awareness of saying, “We are number two.” And this being number two, in our case in Latin America, is so terribly true. This is why they have had so many downgraded credit ratings. It’s not just in the region, because even the U.S. or France has been downgraded. But here in Latin America, there is less tolerance, less patience on the part of investors, rating agencies, and banks, when we make policy mistakes and policy omissions. I see it from the perspective of an observer, which is what the OECD is in Paris. We know developing countries enjoy less room for mistakes and less time to delay their decisions because procrastination is punished very severely. Not only are we coming from behind, we probably have less time, so we should accelerate. 

WPJ: So is that your priority, as leader of the organization of the developed world dealing with the developing world, especially Latin America—to accelerate those trends? And if it is, how will you do this? 

GURRÍA: We know the three challenges—inequality, informality, and productivity. Around those challenges you can put a big, important wrapper, which is better government, better integrity, and transparency. Not all of it is the fight against corruption. Rather transparency and integrity are things that you have to be on the lookout for. We are coming from behind, so we have to make an effort. The problem again comes from reforms, reforms, reforms. Were they undertaken? And when undertaken, were they serious, deep, broad, and ambitious enough? Well, there is no single answer. In some places, they were very ambitious. In some cases, they were broad and deep, and in some cases, not at all. And now you see the difference in the consequences. Latin America is not a single entity where everybody is performing in the same way, even in a worldwide slump like we are suffering now. 



[Illustration courtesy of Sohyun Kim]

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